it's "options action" on friday night. are you ready? welcome to the show. i'm melissa lee. these are the options actions traders. tonight, your plan to protect gold gaines for free. your plan to make money on disney, no matter what the sdok does, and how a trade with a 20 to 1 payout that's no riskier than buying a stock. not bad. guys, first of all, we are back from our thanksgiving hiatus and a lot has happened. financials, in fact, front and center this week. b of a's huge offering. banks and broerks have lagged the market over the last two weeks. so with the successful offering of bank of america, could this ignite a rally? the financials? >>ite could do. there are about six important banks that have yet to pay back t.a.r.p. once they saw this offering go

well a lot of people are trying to roll up their sleeves, try toeg figure out who's next, how do they do it, do they do it without being too delutive. we know there's some more inventory coming in the space. and so that's something we're probably going to have to look at. we started the week with financial-related news with the dubai situation and actually traded really, really well. the news this morning with the jobs report, we initially traded great and then we sold off. it's kind of a confusing week and hard to put your arms around it. >> the dubai incident didn't prove to be a big problem. as far as the overhang is concerned, we talk about these deals balanced budget extremely diluted, but the fact is, we know, we knew before the bank of america secondary came along that this was going to happen. i think citibank was the one that we're interested in happening next. we've got to figure out what the u.s. government is going to do. >> i would imagine the option

activity is not very active. citi is only a $4 stock. >> it's a $4 stock but the markets are only a penny wide, so you've got professionals getting in there, trying to make something happen. but dan talks about the markets rolling over this morning. that's not entirely unexpected. we had seen the s&p example didn't want to be away from $1100. we have seen that before. everyone wants to take their ball and go home for the year. but as far as financials are concerned, bank of america has shown the way out for second-tier names. >> they' shoun shown it. here's what i'm focused on right now, the second-tier names have this road ahead of them. the first tier names, the low-hanging fruit has been picked off the march bottom. those stocks are up 70%, 80%, 90% year to date. so the second-tier names is going to be a hard one. you're going to have to roll up

your sleeves and figure out how these guys get out of it and what the earnings picture look like. >> does that mean the overall group, the financial sector may not necessarily move higher as a group anymore? >> i don't necessarily think so. it doesn't surprise me to see trouble in goldman sachs. they've been taking a lot of negative press. i personally think that bank of america and some of these other names, i think things still look good for them. >> the thing about the bank of america trade was that for the first time when we had one of the second tier names, it wasn't an opportunity to sell calls. the last time we had somebody raise a bunch of money, it was just a free for all to sell calls. we didn't see that in bank of america today. the stock was strong. there was a lot of call activity. but, you know, that was just -- that's natural, that's normal. that's real call activity. >> bank of america is in the books and you mentioned, we are

all looking ahead towards who's next. wells fargo is certainly one of the names out there. >> war len buffet who owns 7% doesn't think so either. this stock has underperformed other banks. it's the only large bank down on the year, down 9% year to date. it's kind of troubling, stuck in a range here. and i think that t.a.r.p. is a very big overhang. you know, that said, listen, i think once they do it and if they do it like the ceo says in a shareholder friendly mannering i think this works out pretty well for your investors of wells fargo. so one of the things i want to do, rather than buying the stock right here, i want to do a risk revers reversal. i'm going to pay 10 cents for that. i'm buying the april 30 call for $1.45. and to finance that purchase i'm

selling the april 23 put for $1.35. so net, net it cost maes dime to put that on. how do i make money? between now and april expiration. as the stock goes up towards that higher strike, i get longer the stock, okay, and as it goes lower, i get longer and i start losing money. but at april expiration, if the stock is above 30, i'm long, i make money. if it's at 23, though, i get long there down. that's down about 14%. >> you mentioned april expirati expiration, why april? >> i think the guys are going to need a little time. they have to figure out how to do nit a shareholder manner. i think 4 1/2 months makes sense to look out, to put this trade on. you don't want to do it in january. it doesn't seem like it's going to happen there. >> how do you pick the strike prices? >> they had raised about $8 billion, you know, six months ago at $22..

>> scott, what do you make of the trade? >> i like risk reversals a lot. i will say this about wells fargo, i don't know how much more shareholder friendly you can be than what bank of america did. the only way is to win the lottery. >> wells fargo, i like this trade a lot in wells fargo. bank of america really needed to do this deal. they would have sere us problems with t.a.r.p. it looks like it was influencing the management of the company, what they could pay their executives. it was in a stronger position at the beginning of the year. it was already better off. >> that's one reason i like this trade. it's been a laggard, okay? it hasn't participated. >> these stocks are 15% off their 52-week highs.

it may start to -- i really like risk reversals in general. it's not free. it is going to eat up some margin, and you can't forget that. but it's important to remember that wells fargo is probably the best name left of the second tf tier names that hasn't raised any money. one thing, bank of america supposedly had six people turn them down for the ceo job. wells fargo has a ceo, but they may have trouble filling the roster a little bit below ceo if they can only pay $500,000 a year. >> interesting note there. check out our web extra exclusive trade on citi. >> options traders don't seem as bearish as the action we saw today. >> starting with the action we

saw today. >> everybody is going one way into a trade, when that stops, inevitably, it's going to be a little bit painful, but options traders didn't have quite the same knee-jerk reaction. the five most active options in gld, the gold etf were all calls. and so we weren't really seeing everybody rushing out to buy puts and really getting bearish in gld on the options side. >> how did you determine tactio in the options pit? >> he's right, there was a lot of call. gold bugs are true believers, i don't see how you're not nervous right now. it doesn't seem like this is a great time to come in and buy gold. >> seems like everybody loves this trade. >> they were joined bay very big investor today. there was a december 118/121 call spread that traded for 67

cents and traded 72,000 times. it's massive tratd on a very short-term basis and someone is risking 67 cents to make $2.3 on a day gold had one of its biggest down trade in months. >> the problem with some of these dollar-driven trades is when they come unwound, it is really ugly. they don't come unwound really orderly. it's all at once. >> with all that said, mike, you've got a trade on gld, walk us through. >> i think what scott just said is really critical. the thing can move down very rapidly. possibly down more rapidly than up. so what i'm saying for people long gld, they want to carry the long gld into the end of the year but they're not sure. i'm looking to put on the january 108/120 collar. purchase the january put and selling the jan 120 call for $1.75 to finance that purchase. typically in gld, the down side

has been a little bit cheaper in the upside and this made the trade more attractive historically. if this thing really rolls over, you've got some protection. >> let's quickly break this trade down. expiration, why january? >> just because i want to be able to carry it past the end of the year, for sure. one of the things you definitely want to take a look at is whether or not you want to unwind a position before the end of the year. there can be implications of doing that. i was looking at putting this protection on through the end of the year. >> why these strikes? >> it rolled over at 120. one might argue if it doesn't manage to break through 1,200 again it might be off to the races. however in this particular instance, what i'm really looking to do is find something that can help me offset some do downside risk and not have too much of it. >> don't rush out and do this monday morning if you're long gld because you've got to see where it's trading. >> that's right. >> this is a very tight collar here. you're getting some pretty close protection. this thing comes in, you know, a few more dollar, you know, that

may be it and you do not want to sell that 120 call if you think it has the potential to go back up. >> that's action absolutely right. but normally you don't get to put a collar on for zero and have the put equidistant at the money as the call. this is a special situation. it works with gld. doesn't always work. >> it's time to "buy write." selling covered call against stocks that have had a good run is a great way to make money. it's always good for a little refresher course. let's break out the options playbook and talk about buy writing. first of all, how you pick your strike prices? >> i pick 10% out of the money to justify the trade. any closer to at the money, we're going to risk going

through the strike before the trade is off. farther than 10% out of the money we're not going to get any premium to justify the trade. >> how much premium makes it worth it? >> i want to receive at least 3% of the underlying stock price in premi premi premium. i want to go out % or 4% per month. we're not really going to compensate for the length of time we have the trade on. and any closer, the trade may not generate premium to give us the return we're looking for. >> walk us through disney. >> disney is an interesting story. didn't disappoint on its last earnings. it has a 17 p/e. its dividend yield is negligible, around 1%, but disney off the march lows is 65%

off its 52-week low has almost doubled. it's a little more than doubled. perhaps you like disney, but what's it going to do out two, three, four months. what kind of return is it going to generate over that amount of time, how much higher can it go? so what do i want to do? sell the april 33 strike call and bring in a dollar over disney and that's the buy-write i have on. let's go back and break the trade down. we pick the 33 strike. that's 10% almost exactly out of the money. let's check the term. it's april. there's no march term on. bringing in $1 in april, that satisfied what i want in the playbook. and lastly, the premium. we're bringing in $1, that's almost exactly % of our underlying -- the underlying stock price that closed at 30. so that fulfills what i think are all the parameters and what we want in a buy-write when we overwrite a stock. >> what do you make of the

trade? >> i like the trade and it makes a lot of sense. we talk about these in the past. you know, you really have to keep up with the story. if the story changes and you think the thing has a potential to go higher, you don't want to stay short that call. you buy write things you like the underlying stock and store rirk but you've got to keep up on them and make sure you move if the story changes. >> okay. thanks so much for your time, we appreciate it. coming up, mike had a strategy on dell that so far returned 500%. and it was no riskier than buying a stock. find out how he did it right after the break. >> time for "pump up the volu volume." based in canada, that communicationss colasus, but traders are concerned about a pick.

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where were options traders

pumping the volume this week? research in motion. at one point today, call volume was twice the daily average. welcome back. for more check out optionsextras@cnbc.com. a couple weeks back, mike suggested a bearish options trade that offered a 20 to 1 payout, but so far he's only up 500%. on options action, we live by a simple code -- risk less to try and make more. that's exactly what mike did with dell. >> i'm looking to buy the 15-14 one by two put spread. >> let's make it as easy as one, two, three. mike thought dell stock was headed lower going into earnings. >> i'm a little bit bearish on this one. >> so he bought the 15 strike put for 15 cents. now he makes money as long as dell's stock falls by more than what he spent.

but mike, can't we do this on the cheap? >> i'm going to sell two 14. >> take the 60 cents he paid for one put and subtract the 55 cents he collected from selling the other two puts and mike only spent a nickel. but it gets better. because making money on this trade just got a whole lot easier. why? he could only make money if the stock fell by 60 cents by expiration. now he can make money if the stock falls by five pennies. >> make money all the way down to $14. >> this is a trade that is going to make the most money if the

stock drops down to about the 14 level. >> but just as mike capped his cost, he also capped his profits by selling those puts, mike has limited the money he can make to 95 cents. that's a difference between the put that he bought and the one that he sold, minus the cost of the trade. but there is another trade-off. remember, mike sold two of those 14 stripe puts, not just one, and that means he could be forced to buy dell stock if it falls below $14. but fear not. mike has built in a buffer. the 95 cents profit he made on the way down? well, that gives him breathing room below $14. unless dell stock hits $13.05, mike will not lose money by expiration. good thing for mike. that's because since the time of the trade, dell's stock has fallen below $14, but not as low as $13.05. now khouw must keep his cool. take profits off the table now,

or bet that dell stock goes back to 14, giving him his maximum gain. now the market is at a stand still, and traders around the world wait with baited breath, all with the same question. what will mike do now. all right. before mike answers, the legions of fans around the world, time for stocks versus option. had you simply shorted dell stock you would have made 13%, not bad, but faced unlimited risks. now margin requirement ace side, a nickel a premium and is now worth 25 cents, and that is a return of 500%. plenty left, though in that trade. so mike, what do you do now? >> you know, the whole thesis here was that the stock was going to fall after earnings. i really didn't think it was